From the Fund Manager’s desk on

Motilal Oswal Midcap 30 Fund

(Mid Cap Fund – An open ended equity scheme predominantly investing in mid cap stocks)

Dear Investors,

We had written to you in April 2018 highlighting the realignment of our portfolio and the way ahead. It takes us great comfort to say that we have achieved what was envisaged from our portfolio and the changes made have given us an edge over our peers by way of performance and fundamental attributes.

We appreciate your patience and faith in this journey of long term wealth creation. This note is aimed at apprising you on why this is an ideal time to add allocation in the midcap space and moreover in the Fund.

1 Year 3 Year 5 Year Since Inception
CAGR (%) Current Value of Investment of 10,000 CAGR (%) Current Value of Investment of 10,000 CAGR (%) Current Value of Investment of 10,000 CAGR (%) Current Value of Investment of 10,000
Scheme -7.34 9,266 9.40 13,170 18.41 23,278 18.53 23,447
Nifty Midcap 100 TRI (Benchmark) -14.18 8,582 14.35 15,006 17.75 22,634 18.04 22,970
NAV () Per Unit
(23.4474 : as on 28-Feb-2019)
25.3056 17.8031 10.0726 10.0000

Data as on 28 February 2019; Category average includes all the midcap funds in the industry; Source: MFI Explorer)

The performance of schemes of Motilal Oswal Mutual Fund is Benchmarked to the Total Return variant of respective Index chosen as Benchmark as against Price Return variant of respective Benchmark Index. Incase, the start/end date of the concerned period is non business date (NBD), the NAV of the previous date is considered for computation of returns. Past performance may or may not be sustained in the future. Performance is for Regular Plan Growth Option. Different plans have different expense structure. This scheme is currently managed by Mr. Aakash Singhania. He has been managing this fund since 28-July-2017; Mr. Niket Shah is the Associate Fund Manager for equity component since March 1, 2018 and Mr. Abhiroop Mukherjee for debt component.

When we compare our fund performance to the index, it is very evident we stand out in terms of performance over the last year across periods. From a portfolio perspective, we had made major changes (around 45%) during August to November 2017 wherein the weights in the pharma and agro-chemical sector had been substantially reduced and focus had been on picking stocks with higher stability and visibility of earnings growth.

Recent correction a buying opportunity

Every market fall should be seen as a buying opportunity to tactically add equity allocation. Historically, large corrections in Midcaps is followed by a strong recovery in subsequent years. In the graph which is followed, we see relative underperformance of Midcaps to Nifty which is followed by huge outperformance in subsequent years.

(Source: Motilal Oswal Asset Management Internal Analysis)
The above graph is used to explain the concept and is for illustration purpose only and should not used for development or implementation of an investment strategy.

The above graph shows performance difference between Nifty and Midcap 100 index (one year difference calculated on a daily basis). In the last 17 years on an average Midcaps have out performed Nifty by 8%. Whenever the underperformance tends to reach around 16-18% its followed by a strong out performance. Current 20% underperformance by Midcaps may lead to healthy returns going forward. Thus merit in tactically increasing Midcaps in the portfolio.

Index vs the broader universe

Even though we look at the headline index performance for judging investment decisions, it is not replicated in the fund returns. In last 1 year the index is holding on due to few stocks whereas the broader universe has seen sharper correction. For e.g. Nifty50 has delivered 3% returns since Dec 2017, and although this is very moderate, it is largely driven by a group of 15 Nifty stocks (which contribute 65% of the market cap) which were up 16% while the other 35 stocks were down by 16%. Similarly in the Midcap 100 index the top 30 stocks (48% of Midcap 100 market cap) have given flat returns over the period and the other 70 constituents are down by a massive 30% or more.

This trend in both the indexes show the broader markets are much more attractive than what the Index levels indicate. This is where it benefits to invest in an actively managed portfolio where the Fund managers are always looking for buying opportunities to invest in growth stocks on its merit irrespective of index levels.

Why Motilal Oswal Midcap 30 Fund

Earnings Growth^ Quarter Ending
(Sep 2017)
Quarter Ending
(Dec 2017)
Quarter Ending
(Mar 2018)
Quarter Ending
(Jun 2018)
Quarter Ending
(Sep 2018)
Quarter Ending
(Dec 2018)
Average
Weighted Average Portfolio 40% 21% 43% 30% 21% 16% 29%
Benchmark -10% -16% -53% -2% 11% 4%** -11%
Return on Equity* Apr 2016 to Sep 2017 Oct 2017 to Mar 2018 Average
Weighted Average Portfolio 17.8 20.5 19.2
Benchmark 5.4 5.7 5.6

**The calculation is for 97 companies (Source: Motilal Oswal Asset Management Internal Analysis)
^Earnings growth: Weighted average Portfolio is calculated by stock level profitability multiplied by weight in portfolio; Benchmark is calculated by stock level profitability multiplied by weight in Benchmark.
*High Return on Equity indicates better profitability of the portfolio

Past performance may or may not be sustained in the future. Earning growth and Return on Equity provided above are comprises of stocks currently comprising of the portfolio of the scheme, actual performance of the scheme would be based on entry of the stock in the portfolio and its continuation of holding in the portfolio. The said stocks may or may not be constituents of the portfolio of the scheme in future and will be subject to change without notice.

The Earnings and the Return on Equity profile of the Fund's portfolio companies has been comparatively better than the index. In the past during strong earnings growth phases, earnings of Midcaps grow at a much faster pace compared to Nifty and if the turnaround of earnings growth happens going forward, midcaps is expected to lead the same.

High Quality and High Growth stocks tend to trade at considerable premium over the Index, however currently given the pessimist market behavior towards midcap space the Fund's valuation parameters is at a discount despite high profitability growth.

All the above point towards the quality aspect of the fund with sustained growth.

Stock Selection and Buy Right Sit Tight philosophy

Alpha in a fund is generated by allocating more to winners and avoiding (or have reduced exposure) to laggards. Motilal Oswal Midcap 30 Fund has been able to identify and allocate to more winners in the portfolio. As per the philosophy of having concentrated portfolio, the Fund construct has a large allocation away from the index thus generating higher earning profile which makes it stand apart.

MOF30 is the only scheme which has as low as 27 stocks (less than half the category average).

Skin in the game

We are fully committed to the Funds we manage and our group proprietary surplus is invested in our mutual fund schemes. For further information on proprietary investments, kindly refer the SID on our website.

Markets reward patient long term investors who are unperturbed by past volatility and be fearful when the tide is against. Today when most investors are fearful of the midcap space we believe it is the right time to start allocating to the fund.


Yours Sincerely,

Akash Singhania
(Fund Manager- Motilal Oswal AMC)

Motilal Oswal Midcap 30 Fund

(Mid Cap Fund - An open ended equity scheme predominantly investing in mid cap stocks)

This product is suitable for investors who are seeking*
  • Long-term capital growth
  • Investment in equity and equity related instruments in a maximum of 30 quality mid-cap companies having long-term competitive advantages and potential for growth

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Riskometer



Investors understand that their principal will be at moderately high risk